Tim Harford – someone I personally believe is one of the best economists of our time – has come out stating that modern macroeconomics is a failure. (ht Economist’s View – note that commentary in this post is very good, I agree with much of what Mark Thoma is saying except for the belief that the economic model is different between now and “normal” times. His point on the lack of data to calibrate is very very true).

Now, Tim Harford is one in a list of very smart, non-macro economists who are attacking macroeconomics. I don’t agree – as I’ve discussed here.

My main concern now is not so much that these incredibly smart people are attacking the discipline – a discipline does its best work when it is being critiqued. My main concern is the lack of counter-arguments I am seeing from real macroeconomists. Where are they? Where is their defence? I have stated why I think contemporary macro is defendable – but I’m no macroeconomics professor from Harvard.

Until macroeconomists can define the role and scope of their research, and justify their methodology in a way that other disciplines can relate to we are just going to be stuck with arbitrary criticism. As a result, I think the lack of explicit discussion surrounding methodology is the real issue in macroeconomics …

Note well that the “macroeconomists” have never answered the devastating and decisive arguments against them provided by Friedrich Hayek, for example in his Nobel Lecture, “The Pretense of Knowledge”. Most of these criticisms of “mainstream macroeconomics” are simply variations on or almost duplicate re-treads of the scientific arguments found in Hayek. A giant crime against science that the economists preferred mathematical technique and political popularity over genuine scientific and economics understanding all those years ago.

My main concern is the lack of counter-arguments I am seeing from real macroeconomists. Where are they? Where is their defence?

A plausible hypothesis for this is that there really is no defence. Your argument that macro is not about prediction is disingenous. The DSGE models did predict: they predicted that such a meltdown couldn’t happen. And macroeconomists did belive in this prediction. Just look at how they ridiculed those who did fear a meltdown. Raghuram Rajan’s case is particularly striking, since he is a well regarded mainstream economist.

“The DSGE models did predict: they predicted that such a meltdown couldn’t happen”

Actually this isn’t really true – DSGE models with the correct potential output level would have indicated that the current level of output was unsustainable.

There is of course a big problem in terms of transitions – a DSGE model probably wouldn’t predict the shape of the recession, just where we come out. Hence why macroeconomists said there were imbalances that must correct – but since they can’t predicit when or how they always just place a smooth glide path for growth.

Now a defender of DSGE models would say that we can’t get the transition because we have false auxilery hypotheses – and one of the results of this crisis will be to get people to focus on these auxilery hypotheses and how to increase their realism, which should thereby improve their effectiveness.

“Just look at how they ridiculed those who did fear a meltdown”

Anyone who understood the methodological grounds for macro shouldn’t of criticised the potential for a meltdown – but given their beliefs I can understand how they saw such a situation as a tail scenario.

“Your argument that macro is not about prediction is disingenous”

I don’t think modern macro model building is about prediction persee – it is about creating a framework that can have data and value judgments chucked in to provide explanations and predicitons.

With the severe lack of data macro-economists have, I don’t think they can sell themselves as super accurate predicitive machines – all they can currently do is build a framework that, one day, may allow macroeconomists armed with sufficient data to actually provide sufficient explanations and predictions of phenomenon

Greg. I agree that some of Hayek’s concepts are useful (although many of them did stem from previous writers). However, there is a difference between painting interesting ideas and concepts and putting them in an objective form that can be used for analysis – just ask Sraffa and Robinson how tough it is figuring out how to value capital 🙂

Economists should not steer away from the concepts provided by Hayek – but I don’t think we can say that he provided a full framework with us to work with

Actually I agree with you that macro cannot be mainly about prediction.

My point was that in the past macroeconomists have treated the implications of their models as accurate predictions about the future. So they cannot now put forward the defence that macro is not about prediction.

I find this issue quite interesting actually – as macroeconomists often “talk” about prediction, but when you see the work they do it is constantly backward looking descriptive stuff. I suspect some macroeconomists simply talk up prediction because they want attention 🙂

Description and understanding are the main goals – and I would say that this is what almost all macroeconomists have driven at.

Roger Garrison’s critique was to the IS/LM model – a model that doesn’t capture the essence of price movements in a satisfactory way. I was under the impression his work didn’t capture the essence of price movements either – and without an understanding of prices the framework is far from complete.

Macroeconomists have been trying to move towards an understanding of the economy in a more dynamic sense – and issues like aggregation (and even to some degree competition) do need to be incorporated further into a general type of analysis. But these things are being taken into consideration – they just take time.

“But it is certainly _not_ clear what the significance of the work of Sraffa and Robinson is”

They were part of the socialist calculation debate and they worked on the aggregation of capital as a critique to the neo-classical school. So they are EXTREMELY relevant to what we are discussing.

“I, of course, favor hard thinking by economists on the hard problems — something the profession refuses to reward or encourage.”

Really – if someone was able to come up with a better way to explain short-run economic fluctuations I imagine they would get a lot of attention. If the “Austrian school” could turn around with strong, peer reviewed, empirical evidence showing that their framework had outperformed macroeconomists WOULD pay attention.

But they haven’t …

Of course Austrian authors have raised valid points – and macroeconomists realise that. Hell, I am sure that points that have been raised on both sides have been incorporated by the other. However, I don’t agree with the idea that the Austrian school provides a better framework – I would like to be shown that their models have provided both better accuracy and a more satisfying explanation of movements, but I haven’t been shown that yet.

Also I suspect you are confusing macro with the “freakonomics” type school.

These are completely different disciplines – they just share the definition of economics as a study of scarcity and incentives.

The purpose of the freakonomics school is to inform the study of small scale institutions and individual actions – it is a subset of strict microeconomics.

The fact that they use fancy math models and invest large amounts of time in counter-intuitive ideas instead of focusing on getting immediate output is part of how their discipline is rewarded – however, the incentive structure of a macroeconomist is different.

“If the “Austrian school” could turn around with strong, peer reviewed, empirical evidence showing that their framework had outperformed macroeconomists WOULD pay attention.”

One of the problems is _begging the question_. Different causal theories construct and spotlight different “empirical” evidence. The profession ignores most of the sort of evidence that vindicates Hayekian macro — although as mentioned, folks have sought it out and have published in in peer reviewed publications.

The truth is out there.

I stand by my comments about Sraffa and Robinson — and about a profession that does not reward hard thinking about hard problems. Example — the profession does not reward hard thinking about how economics can possibly provide good causal explanations. That’s one of the most outstanding facts of the profession, in my well considered view.

I still haven’t seen any evidence I find convincing – but it is always possible there could be something.

“Example — the profession does not reward hard thinking about how economics can possibly provide good causal explanations”

The entire discipline is premised on provided causal explanations and testing them – most economics papers have to provide a causal explanation before trying to derive evidence. This was half the reason why it took so long for econometrics to become truely mainstream in economics.

I agree that in the 1950’s macroeconomics was too “holistic” and lost the whole methodological individualistic element of economics – but nowdays this isn’t the issue, economists do go for causal explanations there is just a lot of research that still needs to be done (since this form of studying the macroeconomy only really sparked up in the 70’s).

Furthermore, testing causal explanations is still difficult – because data is so sparse. Economists really do the best they can with a relatively bad hand …

Aren’t you aware of the criticisms of this model of “causation” or of Hayek’s rival account? Guess not.

“The entire discipline is premised on provided causal explanations and testing them – most economics papers have to provide a causal explanation before trying to derive evidence. This was half the reason why it took so long for econometrics to become truely mainstream in economics.”

As Hayek pointed out in his essay “The Facts of The Social Sciences” entrepreneurial learning in the context of changing relative prices and changing local conditions is the central causal / explanatory element in all of economics — AND IT CAN’T BE “TESTED” by econometrics. It’s a simple fact of economic life.

Hayek discusses this fact and how economics explains thing also in his book _The Pure Theory of Capital_ and elsewhere.

Economists don’t get it because they are essentially 1950s philosophers of science, with a false understanding of real science, and a false understanding of how economics explains. That is my view — and Hayek’s.

“testing causal explanations is still difficult – because data is so sparse. Economists really do the best they can with a relatively bad hand … “

What model of “causation” are you saying is criticised – the studies and papers in economics are incredibly broad. I’m talking about the general concept behind the discipline – it is one of trying to explain what has happened more than anything else.

Again you are doing me a disservice here – zillions of us on this blog have complained that single agent “GE” models are really methodological individualistic. There are conditions where they are, but we have all sorts of aggregation problems here that have to be worked out.

Robinson and Sraffa were two economists that realised this a long time ago – and actually tried to come up with measurable alternatives. Again why I think mentioning them is essential …

I do know that Hayek used entreprenuers as a mechanism for changes in relative prices. However, saying that it “cant be tested” is a bit strong.

Ultimately if we want to compare hypothesis we need something testable. In the social sciences it is incredibly hard – but we all need to build up our “social models” to the point where we can test them.

Now, this is one of the reasons I do not want to rule Austrain style economics out – I think it is a discipline that needs further development, I think it is a discipline that in some key ways is completely consistent with neo-classical economics, and I think it is a discipline that has some value even though it is difficult to test.

However I find it difficult when people tell me it is “the one” or the primary explanation of human behaviour – I do not find it complete enough for that, and I think many of the major lessons (although not all) of the subject have been injected in economic study in some way.

“Economists don’t get it because they are essentially 1950s philosophers of science, with a false understanding of real science, and a false understanding of how economics explains”

Are you criticising hte 1950’s positivist revolution in economics? If that is the case you are in agreement with most of the current economic discipline. Economists NEVER really became positivists – for economists it was always about blaming failure on auxilery hypothesis and never touching the core. Austrian economists are no different on this account.

The thing is now, neurology is making our priors testable – we can now nearly take on some of the fundamental value judgments that separate types of economic analysis with data. The discipline is going to change greatly as a result of this – and hopefully in a positive way.

Mark — The fact that people learn and their understanding of things changes isn’t a “hypothesis” it’s foundational, it’s an understanding of what it is to be human — there isn’t anything more primary, and 1950s era philosophy of science of the kind indicated in your remarks below certainly isn’t.

Mark writes:

“Ultimately if we want to compare hypothesis we need something testable.”

This demand to compare “hypothesis” is straight out of Karl Popper, and was passed from Popper directly to Milton Friedman and others. So is the demand for “testing”. It’s 1950s era philosophy of science, and it isn’t a necessary part of economics, just as it isn’t a necessary part of Darwinian biology. You’re doing 1950s era philosophy of science here, you aren’t doing economics.

I reject the idea that the aim of economics is to explain behavior — as did Hayek. Hayek isn’t Robbins or Mises. Hayek invented the building blocks of modern neuroscience as part of the effort to explain human behavior (see Joaquin Fuster), and he developed ideas similar to Wittgenstein on rule imitation as another part of that explanation, as well as other things.

The job of economics in Hayek’s view (and my own) is to explain patterns of order (and disorder) in social phenomena of the overall market.

Mark writes:

“I find it difficult when people tell me it is “the one” or the primary explanation of human behaviour”

“The thing is now, neurology is making our priors testable – we can now nearly take on some of the fundamental value judgments that separate types of economic analysis with data. The discipline is going to change greatly as a result of this – and hopefully in a positive way.”

I’d argue that the legacy of Mach -> Schumpter -> Samuelson is still with us, as is the legacy of Popper & Mill & Carnap -> Friedman & Lipsey, etc.

The economics profession took this legacy and produced their own sundry hybrids — it comes out in a variety of forms that are not “true blue” positivism in a pure Mach / Carnap form, but the legacy is still there, and is still at the “hard core” of economic “science”. I see it every day.

Note well that Hayek is not an “Austrian” if you mean it in the sense of Misesian praxiology, something Hayek explicitly rejected.

Hayek is an empiricist (but not a naive Millian or econometric “empiricist”) who argues in favor of causal explanation — identifying the most important causal element in entrepreneurial learning (as well as elsewhere). Hayek is an empiricist who believes in open ended non-Millian causal elements the way Charles Darwin is an empiricist who provided causal explanations that don’t fit into the math functional “scientific” world view of Mill or econometrics.

Mark writes:

“Are you criticising hte 1950’s positivist revolution in economics? If that is the case you are in agreement with most of the current economic discipline. Economists NEVER really became positivists – for economists it was always about blaming failure on auxilery hypothesis and never touching the core. Austrian economists are no different on this account.”

“The economics profession took this legacy and produced their own sundry hybrids — it comes out in a variety of forms that are not “true blue” positivism in a pure Mach / Carnap form, but the legacy is still there, and is still at the “hard core” of economic “science”. I see it every day.”

That is a very interesting claim. I usually hear the opposite – that economist didn’t include enough positivism and relies too much on “introversion” and “internal deduction”.

“Hayek is an empiricist (but not a naive Millian or econometric “empiricist”) who argues in favor of causal explanation — identifying the most important causal element in entrepreneurial learning”

The important question then is – where did the causal explanations come from – are they from empirical “facts” or are they from introspective theorising.

I am not saying either side is better – and in reality both complement ideas. But I don’t see this as any criticism of current economic research – you simply seem to be saying the Hayek did what academic economists actually do now …